Chafee administration rehires company being sued in 38 Studios fallout

Monday

May 19, 2014 at 10:15 PM

First Southwest had a key role in pitching to both the EDC board and the nation’s bond-rating agencies the $75-million state-backed loan the state’s Economic Development Corporation gave former Red Sox pitcher Curt Schilling.

Katherine Gregg Journal Political Writer kathyprojo

PROVIDENCE — The Chafee administration has rehired, as the state’s financial adviser, one of the companies it is suing for fraud, negligence, legal malpractice — and a host of other alleged misdeeds — in connection with the 38 Studios debacle.

In March, Governor Chafee and state General Treasurer Gina Raimondo gave the go-ahead for a new two-year state contract with First Southwest, the Lincoln-based firm that has been the state’s financial adviser since 2001.

First Southwest had a key role in pitching to both the EDC board and the nation’s bond-rating agencies the $75-million state-backed loan the state’s Economic Development Corporation gave former Red Sox pitcher Curt Schilling. And the state’s lawsuit says the company misrepresented — or withheld — critical information that likely would have been “fatal to the entire transaction.”

The governor and treasurer nevertheless chose First Southwest over the only other company that bid, the PFM Group, whose “new RI team all came over” from First Southwest, according to state officials who reviewed the proposals.

The decision to rehire First Southwest drew this rebuke from Frank Caprio, the former state treasurer seeking to win back the office: “Rhode Island is in a battle with the bond rating agencies. The outside firm we are paying over $4,000 a week for rating agency relations is conflicted and therefore cannot fight for the taxpayers on the 38 Studios issue. I find a major problem with that.”

Top aides to Chafee and Raimondo did not respond directly to his comments, which were sparked by the sharp warning last week from Standard & Poor’s — about the financial consequences should Rhode Island lawmakers refuse to pay the 38 Studios “moral obligation” bonds.

A joint statement was issued by spokeswomen for Chafee and Raimondo when asked why the state would hire anew, as its financial adviser, a company the state is aggressively suing:

“In late 2013, the State Budget Office and Treasury jointly issued a request for proposals (RFP) to select a financial advisor [sic] for the state. Two firms, First Southwest and the PFM Group, responded to the RFP. After a thorough review, the State Budget Office and Treasury unanimously selected First Southwest in March 2014.”

They credited the company with the recent $78.7-million refinancing of approximately $84 million of earlier debt, under terms that will save the state $6.7 million over the life of the issue which matures in 2025.

They also made public the evaluation score sheets which said, in part, “State has had excellent experience with FSW. Available whenever needed. Excellent track record.”

The unidentified evaluators had high praise for state’s main contact at the company, Maureen Gurghigian. Beyond that, they said: “This is a transition year with new governor and treasurer next year — consistency important.”

Asked to reconcile the “excellent” rating with the lawsuit, Raimondo spokeswoman Joy Fox said: “The Budget Office and Treasury staff reviewing the proposals were aware of the pending litigation,” but “Treasury was not involved in bringing the lawsuits … [or] issuing the 38 Studio bonds.”

Added First Southwest’s lawyer Gerald Petros: “First Southwest contests the allegations in the lawsuit but cannot comment further on current investigations or pending litigation.”

Of the new contract, he said: “First Southwest is gratified that the State has selected us, after a competitive process. … Our local presence enables us to focus on providing service to issuers in the State.”

It is not clear how much First Southwest will be paid. State budget officer Thomas Mullaney said they are guaranteed a $25,000 retainer, plus a fee for each transaction that varies based “on the type of issuance and the amount of the issuance with caps ranging from $40,000 to $57,500.”

Fox said: “The amount of fees paid to First Southwest depends on the volume of services they provide, but generally run between $175,000 and $250,000 annually.”

As the state’s financial adviser since around 2001, First Southwest consults with the treasury and state budget offices on all aspects of the state’s bond offerings and managing the state’s debt, including bond pricing and rating agency relations.

First Southwest is also one of the 14 defendants in the lawsuit the Chafee administration filed in November 2012, in an attempt to recoup the state’s potential losses on its failed $75-million investment in Schilling’s now bankrupt video-game company.

Excluding amounts set aside in reserve, taxpayers owe the investors who purchased the bonds just over $89 million in principal and interest for the failed loan then-Gov. Donald L. Carcieri’s administration gave Schilling’s company to induce it to move to Rhode Island from Maynard, Mass., with 450 jobs.

In addition to Schilling, the other defendants include the Adler Pollock & Sheehan and Moses Afonso Ryan law firms and Wells Fargo Securities.

The suit alleges that First Southwest and the other defendants “knowingly” made false statements about 38 Studios’ ability to repay the loan and that they “intentionally defrauded the EDC Board and the EDC … which would not have issued the Bonds but for those acts, practices and courses of conduct.”

The lawsuit also accuses First Southwest and others of misrepresenting that the EDC had entered into an agreement with IBM as a third party monitor, “while in fact IBM reported only to 38 Studios, and had no duties to the EDC.”

First Southwest was paid $120,000 out of the bond proceeds, Adler Pollock $124,790, and Moses Afonso $190,000, according to the court filing.